EU Tax Systems, Tax Systems in Europe, European Union Tax System

By: EconomyWatch   Date: 30 June 2010

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Following India's growing openness, the arrival of new and existing models, easy availability of finance at relatively low rate of interest and price discounts offered by the dealers and manufacturers all have stirred the demand for vehicles and a strong growth of the Indian automobile industry.


The tax burden in the EU area is much higher than in most other OECD countries. Defined as the tax-to-GDP ratio, it stood at 40 per cent in 1998, some 11 and 12 percentage points higher than in the United States and Japan, respectively. The tax mix is also different. Most EU countries rely heavily on social security contributions, consumption and environmentally related taxes. On the other hand, corporate income and property taxes account for a much lower share of total tax revenues than in Japan and the United States -- the United Kingdom and France being the main exception to

Shifting the tax burden from labour to capital in EU

The average effective tax rate on labor in the EU area appears to be about 15 percentage points higher than in the United States and Japan While the calculation of average effective tax rates suffer from methodological problems and does not take into account any shifting of tax incidence. There is little doubt that tax in the EU area concentrates heavily on the labour markets. Labour income is most heavily taxed in Austria, Belgium, France, Italy and the Nordic countries while the United Kingdom, Ireland, and Portugal stand out for taxing labour income at an average effective rate broadly equal to that of the United States and Japan. Since the mid 1990s, many EU countries have introduced measures to lower the tax burden on labour, typically by reducing payroll taxes to boost the demand for labour, and foster work incentives. Several countries have recently shifted the tax burden away from labour intensive activities in order to give a further boost to the demand for labour.

Some EU countries have recently lowered the generous tax allowances granted through the corporate income tax for the depreciation of equipment investment, thus rebalancing the relative cost of labour and capital.
Lowering indirect taxes on labour intensive activities

The European Council adopted in 1999 an EC directive granting an option to those EU countries who wish to do so to apply a reduced VAT rate to certain labour intensive services, for the period 2000-02. The objective is to stimulate demand for these services, and thus employment, and to bring part of the informal economy back to the surface.

Activities targeted are: (i) small repairs to bicycles, footwear, leather articles, clothing and household linens; (ii) renovation and repairs to private housing; (iii) Window washing and cleaning of private homes; (iv) home health care; (v) hairdressing. Nine countries have seized this opportunity: Belgium, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Portugal, and the United Kingdom (for the Isle of Man only).

Variations in consumption tax rates and exemptions across countries may distort International competition.International differences in VAT rates do not seem to affect consumption choices greatly, although they can have a significant impact on cross-border shopping in boundary areas and on a few goods and services. In fact, while harmonization efforts in the 1980s and early 1990s were reflected in a lower dispersion of VAT rates, the 10 per cent range in standard VAT rates across EU countries has persisted since 1993, suggesting that there is no clear spontaneous trend towards harmonization. Since the application of reduced or super-reduced rates is not homogeneous across EU countries, bilateral variations for some products are much higher. The tourism industry where price competition is important provides an example.

VAT rates range between 3 and 25 per cent within the EU area. The dispersion of excise duties is even larger and induces not only cross-border shopping but also smuggling. Some EU countries can maintain lower indirect tax rates, thus attracting consumers from neighboring countries. This serves to raise their tax revenues at the expense of neighboring countries.


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